BURMA: STILL NO SALE OF SHWE GAS

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000156

SIPDIS

SIPDIS

STATE FOR EAP/MLS; INR/EAP; OES FOR JMIOTKE AND ACOVINGTON;
EAP FOR JYAMAMOTO; EEB FOR TSAEGER
PACOM FOR FPA;
TREASURY FOR OASIA:SCHUN

E.O. 12958: DECL: 02/28/2018
TAGS: ECON ENRG PGOV EPET BM
SUBJECT: BURMA: STILL NO SALE OF SHWE GAS

REF: A. RANGOON 003


B. 07 RANGOON 1122

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Classified By: Economic Officer Samantha A. Carl-Yoder for Reasons 1.4
(b and d)


1. (C) Summary. Despite announcements that Daewoo would
begin selling gas to China by 2011, PetroChina and Daewoo
have yet to sign the final sales agreement. According to
Chevron's David Peters, before PetroChina will agree to a gas
price, it must first determine the overall cost of the
900-mile pipeline to ensure that it makes a profit.
Additionally, PetroChina remains concerned that the Shwe Gas
fields, with its 3 trillion cubic feet of certified reserves,
will not produce enough gas to make the pipeline financially
viable. Daewoo will continue exploratory drilling in the A3
block in 2008, in an effort to locate additional reserves.
Thailand's PTTEP and China's CNOOC signed an agreement last
week to swap 20 percent shares in their offshore blocks,
enabling the companies to minimize the financial risk of
exploration. CNOOC will receive 20 percent shares in PTTEP's
M3 and M4 blocks, while PTTEP will receive 20 percent shares
of CNOOC's A4 block and onshore C1 block. CNOOC and PTTEP
plan to begin exploration of M3 and M4 blocks in 2008. End
Summary.

Shwe Gas Contract Delayed
--------------


2. (C) Despite announcements that Daewoo would sell Shwe Gas
to China (Ref A),Daewoo and PetroChina have yet to ink the
final sales contract, Chevron representative David Peters
told us. The two companies continue to negotiate over the
final sale price, which will depend upon the total cost of
pipeline construction and how much gas Daewoo can produce
from the Shwe fields. According to Peters, PetroChina
recently began its pre-engineering studies to determine the
cost of pipeline development, a process that can take up to
one year. Conservative estimates place pipeline construction
costs at $1 billion, although Peters opined that due to the
length of the pipeline (more than 900 miles) and the rough
geographical terrain that it will cover, total cost will
likely be in the $2-3 billion range. PetroChina is unwilling
to set a price for gas until it knows that it will make a
profit from this deal, he continued.


3. (C) PetroChina also has concerns about the amount of gas
that the Shwe fields will produce. According to Daewoo, the
largest gas field in the A1 and A3 blocks holds 3 trillion
cubic feet of certified reserves. The reserves currently do
not justify the pipeline, so PetroChina wants Daewoo to
confirm additional reserves before it signs a sales
agreement, Peters stated. Daewoo Drilling Manager Bruce
Leach told us that Daewoo, which believes the Shwe fields
hold more than 5 trillion cubic feet of gas, has plans to
drill five additional exploration wells in the shallow waters
of the A3 block in 2008. Once Daewoo secures a rig, it will
conduct exploratory drilling in deeper waters, although this
will cost the company an estimated $60 million per well.


4. (C) The Shwe Gas will go to China, although not by
China's predicted date of 2011, Peters declared. The
Daewoo-PetroChina agreement will likely be signed by the end
of 2008, he stated. In the meantime, Daewoo will continue
exploratory drilling in the hopes of finding more reserves,
although exploration often takes 3-4 years. Additionally,
CNOOC, which controls the A4 block directly below the Shwe
Gas fields, will begin limited exploration in 2008. If the
Shwe fields alone do not yield enough gas to warrant the
pipeline, Daewoo and other companies with confirmed reserves

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may have to pool gas resources in order to sell to China,
Peters noted. This scenario would delay Shwe gas production
another three to four years.


5. (C) Peters informed us that the Burmese Government and
PetroChina will sign another memorandum of understanding for
the Shwe Gas pipeline by April. According to Peters, the GOB
will allow PetroChina to take the lead in building and
operating the pipeline, although Daewoo and its consortium
partners have the option to join PetroChina in the gas
transportation process. The Myanmar Oil and Gas Enterprise
(MOGE) will not be a financial participant in the pipeline
development process, although it may offer to provide labor
to PetroChina.

Thai/Chinese Block Sharing Agreement
--------------


6. (C) Thailand's PTT Exploration and Production Company
(PTTEP) continues to look for ways to develop its four
offshore blocks, M3, M4, M7, and M9. Although PTTEP
announced in November that it was looking for foreign
partners to help develop its M9 block (Ref B),it recently
signed an agreement with CNOOC to develop blocks M3 and M4.
Per the agreement, CNOOC received a 20 percent stake in
PTTEP's M3 and M4 blocks while PTTEP received a 20 percent
share in CNOOC's offshore block A4 (next to the Shwe gas
fields) and onshore block C1 (in Sagaing Division). PTTEP
and CNOOC will begin seismic surveys in M3 and M4 in 2008,
with possible exploratory drilling in late 2008.


7. (C) Peters opined that the deal benefited PTTEP, which
lacks the knowledge, experience, and finances to develop its
offshore blocks. Exploratory drilling costs an average of
$20 million per well, Peters explained. Per its production
sharing contract with the Burmese Government, PTTEP must
drill at least five wells in the M3 and M4 blocks, a
financial commitment of up to $150 million. By bringing in
Chinese investors, PTTEP reduces its overall financial risk
while encouraging CNOOC to engage in aggressive exploration
of the blocks, Peters stated.


8. (C) Peters questioned CNOOC's decision to swap assets
with PTTEP, given that the gas reserves of the M3 and M4
blocks remain unknown. PTTEP claims that the fields hold an
estimated 40 trillion cubic feet of gas, although other oil
and gas companies believe the amount to be substantially
lower, at less than 3 trillion cubic feet. The Chinese are
desperate for resources, Peters noted, and thus are looking
to secure interests in any of Burma's gas fields. According
to Peters, CNOOC also has limited experience developing
offshore blocks on its own. He doubted whether the alliance
between PTTEP and CNOOC would actually lead to faster
development of the M3 and M4 blocks.

Comment
--------------


9. (C) The Chinese do not have a clear strategy for securing
Burma's natural gas. Although it is in China's interest to
develop the A4 block, which industry insiders believe have
large natural gas reserves, CNOOC will instead help PTTEP
explore the M3 and M4 blocks in 2008. Any gas found in these
blocks will go to Thailand, not China, because of the
geographic proximity to Thailand. While it would make good
business sense for the Chinese companies in the Bay of Bengal
to work together to find natural gas reserves, CNOOC and CNPC
have opted to compete with each other rather than pool
resources. From our standpoint, the positive news is that
these delays postpone revenues going into Burmese military

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hands. Dragging it out provides hope that a democratic
government will reap some of the benefits.

VILLAROSA